A short crop could put a damper on CPR’s coming-out party.
Canadian Pacific Railway is slated to begin selling shares as a stand-alone company next month.
Unfortunately, it will be going to the market at a time when shipments of prairie grain – which provide almost one-quarter of its revenues – are expected to dip sharply.
“This year, with a short crop, may be a very low profitability year for the railways in terms of grain,” said Barry Prentice, a rail analyst with the University of Manitoba’s Transport Institute.
Read Also
Agriculture ministers agree to AgriStability changes
federal government proposed several months ago to increase the compensation rate from 80 to 90 per cent and double the maximum payment from $3 million to $6 million
This year’s prairie grain and oilseed crop is forecast to be about 10 percent smaller this year, with production of wheat down by 18 percent.
Exactly what impact that will have on grain movement remains to be seen, although the Canadian Wheat Board has said wheat and barley exports will be 10 to 15 percent lower.
A CPR spokesperson said the railway is monitoring the situation closely but isn’t ready to reach any conclusions.
“At this point we really believe it’s too early to fully assess what the impact will be for us,” said Ian La Couvee.
The final harvest numbers, carryover stocks and world demand, along with movement of U.S. grain, will all go into the mix in determining how much grain the railway hauls this year, he said.
Regardless of the final numbers, Prentice said any decline in traffic is always bad news for a railway.
“In a high fixed cost industry like a railway, if you suddenly have less traffic to move, you still have the same fixed costs,” he said.
In 2000, grain shipments generated revenues of about $804 million for CPR, accounting for 22 percent of total revenues of $3.66 billion.
Prentice said it’s too early to say when the decline in traffic will show up in CPR’s books. If grain movement stays strong through the fall and winter, the railway’s revenues could be relatively unaffected in the final quarter of 2001 and first quarter of 2002.
“But at some point in time it has to catch up to them. There’s only so much grain to move.”
Only time will tell how investors respond to the prospect of a short crop and a resulting decline in revenues, and what impact it has on the price of CPR shares.
La Couvee said he doesn’t think the crop outlook will be an issue for investors.
Aside from the year-to-year variability of the grain business, Prentice said potential CPR investors will also be taking into account the regulatory environment in which the railways operate. Such issues as the revenue cap on grain and provincial fuel taxes on railways, especially in Saskatchewan, could make the stock less attractive.
